Uniform Trustee Act - STEP Canada · Nature & Scope of Uniform Trustee Act ... investing regime –even-handed treatment is achieved without making strict distinctions between income

ULCC Uniform Trustee Act A Proposal for Ontario?

STEP Toronto Sept 12, 2013

Kathleen Cunningham, LL.B., TEP

Chair, STEP Canada Trust & Estate Technical Committee With acknowledgement to Philip J. Renaud Q.C.

STEP Toronto Page 1

History • 1984 Ontario Law Reform Commission:

– Report on the Law of Trusts

• 2004 Report of the British Columbia Law Institute: – A Modern Trustee Act for British Columbia

• STEP Conference – 2007 STEP Symposium ‘Trust Law Reform in Canada’

• Uniform Law Conference Of Canada – Working group, 2008 to 2012 – Final Report Of The Working Group, August 2012 – Uniform Trustee Act (UTA)

• STEP National Conference, Toronto, June 2013 • Next step for Ontario: ???

STEP Toronto Page 2

Trust Law Today

• Primarily non-statutory

• Trustee acts provide enabling powers for trustees when trust instrument powers are inadequate

• Trust terms may override Trustee Act powers

• Exception for “essential” provisions

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Trust Law Today • Trustee acts give courts power to

– provide direction & relief to trustees

– deal with trusts that not operating properly

• Trustee acts are increasingly outdated and in need of reform

– Many statutory provisions are so archaic that it is necessary to draft around them

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Why STEP Supports UTA

• Recognizes importance of a default statute to

– prevent defeat of settlor intention, and

– Reduce complexity of trust documents

• Recognizes “commonality of the principles of trust law” and the desirability and practicality of a uniform trustee act.

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Nature & Scope of Uniform Trustee Act

• Provides a modernized statute for administration of trusts, including:

– appointment and removal of trustees,

– vesting of trust property,

– duties and powers of trustees,

– trustee remuneration and accounts,

– variation, termination and resettlement of trusts

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Nature & Scope cont’d • UTA is not a code of trust law

• It is enabling & supplementary to general law

• UTA provisions apply when trust instrument does not make other provision or is silent

• Exception: Provisions essential to the operation of trusts are expressly stated to prevail over a conflicting term of a trust instrument

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Nature & Scope cont’d • The Act does not apply generally to trusts with

remedial function: – implied trusts

– resulting trusts

– constructive trusts

– any other trust arising by operation of law

• Also excludes certain provisions for trusts arising by operation of an enactment

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Nature & Scope cont’d

• Applies to exercise of trustee functions – inter vivos and testamentary

• NOTE: functions of personal representatives are provided for in estate & succession legislation

• BUT: statutory compensation and passing of accounts has broad application – a trustee is defined to include:

• a testamentary executor or administrator,

• a guardian of an incapacitated person,

• and a testamentary guardian

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Application of the Act (s.2)

• Applies to trusts created before, on or after date Act comes into force (Some exceptions)

• Trust terms override contrary provisions in Act

– exceptions for specified provisions in the Act that are mandatory and cannot be displaced or modified by a trust instrument

– rules of such importance that they ought not to be able to be displaced by the settlor of a trust

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Appointment of Trustee (s.5 -11)

• Designates persons who have authority to appoint substitute or additional trustees

– Persons listed in order of priority may appoint a substitute or additional trustee

– Only one category of persons has the exclusive right to appoint trustees at any given time

– If a category is unable or unwilling to act, the power to appoint passes to next category


Appointment of Trustee

• If trustee is temporarily unable to act, a designated person may

– authorize a continuing trustee or

– appoint a substitute trustee

to administer the trust or exercise the powers

or perform the duties of the trustee

• Court has power to appoint substitute or additional trustees


Trustee Ceases to Hold Office (s. 12-19)

Reasons include:

• Resignation

• Legal incapacity

• Conviction for an offence involving dishonesty

• Undischarged bankrupt

• A corporation in liquidation


Person Unfit To Be A Trustee • Persons unfit to be a trustee may be removed:

– person who is incompetent, – nonresponsive or uncooperative, and – conduct is detrimental to the efficient and proper

administration of the trust.

• A majority of trustees may remove a trustee by written resolution – Resolution is effective 15 days after its delivery, unless

trustee requests a meeting. – Sets out “due process” for trustee to respond to

allegations of unfitness


Person Unfit To Be A Trustee • The court may remove a trustee:

– for same reasons as above – if there are fewer than 3 trustees, or – if the court is satisfied that removal under Act or under the

trust instrument would be impractical and removal would be in the best interests of the beneficiaries or the other objects of the trust

• Court may reduce the number of trustees if it considers it to be in the best interests of the objects of the trust

• Only the court may remove a court appointed trustee


Relief for Alleged “unfit trustee” (s.17)

• The court may grant relief to a trustee who has been wrongfully removed or thought to have been discharged incorrectly


Trustee Powers (s.24)

• Administrative powers of trustee clarified:

– equivalent to those of a vested legal owner, subject to the Act & trustee’s fiduciary obligations

– “ S. 24(1) Subject to this Act and the trustee’s fiduciary obligations, a trustee has the powers and capacity of an individual of full capacity in relation to trust property vested in the trustee as if the property were vested in the trustee absolutely and for the trustee’s own use”


Trustee Powers

• Power to sell or lease trust property

– subject to a contrary limit in the trust instrument;

• Trustee may purchase, rent or build a house for the use of a beneficiary who is entitled under the trust to the money spent for that purpose


Trustee Powers

• Court can confer further powers on trustees

– Included out of an abundance of caution.

– Unlikely this section will be used often

• Example: if the trust instrument expressly withholds certain powers from the trustee but a change of circumstances requires that the trustee has those powers


Duty of Care (s. 26)

• 26(1) In the administration of a trust, a trustee must act in good faith and in accordance with the following:

(a) the terms of the trust;

(b) the best interests of the objects of the trust;

(c) this Act.

• Good faith means an honest belief on the part of the trustee that what the trustee has done, or proposes to do, is proper, appropriate and for the best interests of the objects of the trust


Duty of care

• 26(2) … a trustee must exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person.

• The law assumes that a person of ordinary prudence will be conscientious and diligent when managing the property of others


Professional Trustees (s. 26(3))

• Professional trustees managing trusts for a fee – hold themselves out to the public as having particular

skills to carry out estate and trust administration for remuneration.

– these trustees are held to a standard of care corresponding to the degree of knowledge or skills they bring, or ought to bring, to the task of trusteeship.

– The duty to exercise special skills and knowledge applies to trustees who have or should have them, regardless of whether they hold themselves out to the public as having them.


Conflicts of interest (s.27)

• Restates fiduciary duty that a trustee is prohibited from being involved in conflicts of interest and from profiting from office

• Trustees must act solely in the best interests of the beneficiaries or objects of the trust and avoid situations in which their interests conflict

• Unless expressly authorized by the trust, trustees may not use their office to profit personally or to confer benefits on third parties. Trustees who do so will be in breach of this section.


Conflicts of Interest: Profits

• A trustee is permitted to profit from trusteeship if trust instrument or the law expressly permits it

• Otherwise, a trustee receiving money from the trust (other than allowable compensation) is in breach of Act


Conflicts of Interest: Exception • Common law: a trustee may act while in conflict

of interest, or profit if the trust instrument is silent, only if all the beneficiaries of the trust have consented before the trustee entered into the conflict, or before any profit was made

• The Act allows an application to court for an order permitting trustee to act in a conflict of interest, or to profit personally, as long as doing so is in the best interests of the objects of the trust


Accounting (s.28)

• Duty to report to “qualified beneficiary”

• “qualified beneficiary” means a beneficiary who (a) has a vested beneficial interest in the trust property, or

(b) has delivered notice to a trustee under s.101 (1) and has not withdrawn the notice under s.101 (2);

• “vest” includes to vest by means of: (a) an order of a court of competent jurisdiction; or

(b) the terms of a trust instrument or other legal instrument;


Accounting

• The Act augments existing common law duty of trustee to provide accounts within a reasonable time upon a beneficiary’s request

– requires a trustee to provide specified financial information in each fiscal period of the trust to each qualified beneficiary.

– sets the required period of time within which information must be provided.


Investment Powers (ss30-34)

• Incorporates Prudent Investor Rule

• Follows BCLI model

– Criteria to consider not listed

• Ontario: review

– Given experience, retain existing or adopt UTA?


Allocation of Income & Capital (ss.35-41)

• Trustees have power to apportion expenditures between income and capital

• Trustees can transfer funds between the income and capital accounts to recover or reimburse expenditures between accounts


Allocation of Income & Capital

• Reforms “archaic” area of law concerning allocation of income & expenditures between income & capital accounts

• Provides for possibility of a total return investing regime

– even-handed treatment is achieved without making strict distinctions between income & capital accounts


Allocation of Income & Capital

• Trustee may charge all or part of an outgoing to income or capital of trust as the trustee considers is

(a) just and equitable in the circumstances,

(b) in accordance with ordinary business practice, and

(c) in the best interests of the objects of the

trust.


Abolition of Common Law Rules of Apportionment (s.24)

• Abolishes 1st & 2nd branches of the rule in Howe v. Lord Dartmouth and the rule in Re Earl of Chesterfield’s Trusts

• The rules are closely tied to outdated list of “authorized” trust investments and do not mesh well with principles of total return investing


Allocation of Income and Capital

• “Even hand” duty under general trust law continues unless the trust instrument ousts the rule


Allocation of Income & Capital • Unless trust instrument expressly provides

otherwise, does not apply to – alter ego trust; – joint spousal or common-law partner trust; – post-1971 spousal or common-law partner trust; – pre-1972 spousal trust

• Avoids tainting these trusts which require – Life tenant is entitled to receive all income of the trust

during life, and – no one else may receive income or capital of the trust

during lifetime


Discretionary Allocation Trusts

• Only applies if trust instrument expressly employs the words “discretionary allocation trust” and requires trustee to hold the property on such a trust

• Trustees may exercise discretion as to when, where, how much, from which account and to whom benefits are distributed


Total Return Investment (s.40)

• Determine net value of assets at beginning of each valuation period

• In each fiscal period, pay “specified percentage” to income beneficiaries at beginning of period – Specified percentage set in trust, or – Default set by regulation

• Allocate payment first to income, then capital • Excess is added to capital


Total Return Investment (s.40)

• Valuation period: – First valuation period begins one year after death or

date of settlement if inter vivos

– 2nd and subsequent valuation periods begin immediately after the end of the previous period

– Valuation period is shortest of: • 3 years (subject to change by regulation)

• Period specified in trust

• Period selected by trustee


Total Return Investment – For Which Trusts?

• Charitable trusts and non-profit organizations able to invest on a total return basis – Whether or not the trust allows

• A trust instrument can confer the same powers on the trustees of a private trust – Caution: Spousal, Alter Ego, Joint Spousal trusts

– TIP: Consider drafting trusts now to give trustee power to choose total return investing


Distributive Powers

• Distributive powers allow trustee to allocate trust property to a beneficiary (e.g.)

– power of support,

– power of advancement or

– power to appoint among beneficiaries who are named or described as a class


Distributive Powers (ss42-46)

• 2 types of powers of appointment: – mere powers: donee of the power may appoint,

– trust powers: donee of the power as a fiduciary has the obligation to appoint property determined at the donee’s discretion to each of the power objects

– In the case of a trust power, the failure by a trustee to exercise the obligation to appoint property is a breach of trust


Distributive Powers

• A trustee has power to apply income or capital for the maintenance, education, benefit or advancement of a minor beneficiary

• For an adult, trustee may encroach on up to ½ of the capital for the benefit of the beneficiary, or an amount set by the court


Delegation of Powers

• Powers of an administrative nature may be delegated if reasonable & prudent to do so

• Powers that are distributive in nature may not be delegated


Delegation of Powers (ss 47-50)

• Trustees may engage agents to invest trust property that a prudent investor might delegate, consistent with ordinary business practice and an agent may sub-delegate

• A trustee who delegates this authority may not delegate the duty to determine the investment objectives for the trust


Delegation of Powers

• Trustee must personally select agent & be satisfied of agent’s suitability to carry out the powers or duties for which agent is appointed

• Duty to supervise agent with reasonableness & prudence


Delegation by Power of Attorney (s.50)

• Trustee may temporarily delegate trust powers through a power of attorney where it is preferable to the resignation and replacement of the trustee


Majority Vote (s.53)

• Trustees of a private trust may act by majority, – unless the terms of the trust provide otherwise

• A trustee who disagrees with a decision or act of the majority may dissent in writing: – But must join in carrying out the majority decision

unless it is illegal

– But is not liable for any breach of trust resulting from the majority act or decision

– Not retroactive


Variation of Trusts (ss57-61)

• UTA based on Saunders v. Vautier principles:

– Legally competent beneficiaries may terminate, but not vary, a trust

– UTA: An ‘arrangement’ (a variation, resettlement or termination) of a trust may be effected without court approval if all the beneficiaries are of full capacity and give their consent


Variation of Trusts – Role of Court • Court may consent on behalf of a competent adult who

opposes the arrangement, if court is satisfied that: – arrangement will not be detrimental to adult’s financial interests – and that a substantial majority of the beneficiaries who

represent a substantial majority of the beneficial interests in the trust property have consented or the court has consented on their behalf

– and that not approving the arrangement would be detrimental to the administration of the trust and the interests of the other beneficiaries

• Requirements will not be easily met • Power likely to be used only when beneficial interests are

widely distributed and a small number of beneficiaries are holding out against a generally desired change


Trustee Compensation • Statutory right to ‘fair & reasonable’

compensation:

– includes reasonable fees for professional skills employed in reasonably necessary services

• Allows interim compensation without prior court authorization

– subject to a final determination of the court pursuant to an application by a beneficiary

• the trustee must repay excess compensation


Trustee Compensation

• Account passing may be ordered on application of a beneficiary or trustee

– on a single occasion

– or at intervals set by the court

Charitable Trusts

• When a charitable trust fails, the court may approve a cy-pres scheme without the requirement of finding the donor had a ‘general charitable intent’

• Even if the purposes of a charitable trust or charitable gift have not failed, the court may vary its terms, if the variation would better realize the intention of the settlor

Failed Non-Charitable Purpose

• UTA deals with disposition of surplus monies collected through a public appeal for a non-charitable purpose that has failed

Non-charitable Purpose Trusts (s. 74)

• Recognition of non-charitable purpose trusts – legitimate public purposes as those for which a non-

profit society may be created under provincial and territorial legislation

– performance of a function of government in Canada, (First Nations Trusts)

– or a purpose that a jurisdiction may specify by regulation

• Currently restricted to 21 years (Perpetuities Act)

• UTA allows to exist indefinitely

Exemption Clauses (s.81)

• Exemption clauses aim to excuse a trustee from liability for conduct that constitutes a breach of trust

• UTA balances protection of beneficiaries and the right of a settlor to include exemption clause: – exemption clauses are effective according to their

terms – but the court may, on application of a beneficiary,

declare that because a trustee’s conduct has been so unreasonable, irresponsible or incompetent, the exemption clause is not effective

Rules Against Perpetuities & Accumulations (ss 87-92)

• The Act abolishes the rule against perpetuities and the law relating to accumulations

– Alberta abolished the rule against accumulations in the 1970’s

– Manitoba abolished the rule against perpetuities in 1982

– Saskatchewan in 2008

• Sets out two options to consider

Next Steps

• Activity in Alberta, Manitoba and BC

– Note Saskatchewan (2009); QCC (1994)

• Next steps to consider:

– Review UTA to “Ontarioize” it

– Then propose Ontario implement the UTA

– STEP/Canadian Bar Association coordination

Documents

Uniform Trustee Act - STEP Canada · Nature & Scope of Uniform Trustee Act ... investing regime –even-handed treatment is achieved without making strict distinctions between income